Method of payment

Submitted by :
Arpita Tripathy
Tulasi Kumar Nanda
Method of Payment

Introduction
• International trade is the buying and selling of goods
and services across national borders or territories,
allowing both the buyer and seller to expand their
markets for goods and services that otherwise may not
be made available to them.
• All countries have different assets or strengths in terms
of land, labour, capital, technology and natural
resources. Hence, most countries usually focus on
those products and services which they possess
comparative or absolute advantage through
specialisation

Methods of Payment
• To succeed in today’s global marketplace and win sales
against International trade presents a spectrum of risk, which
causes uncertainty over the timing of payments between the
exporter (seller) and importer (foreign buyer).
• For exporters, any sale is a gift until payment is received.
Therefore, exporters want to receive payment as soon as
possible, preferably as soon as an order is placed or before
the goods are sent to the importer.

• For importers, any payment is a donation until
the goods are received.
• Therefore, importers want to receive the goods
as soon as possible but to delay payment as long
as possible, preferably until after the goods are
resold to generate enough income to pay the
exporter.

Common Method of payments
1. Open Account
2. Bills of Exchange
3. Cash in advance
4. Letter of Credit
5. Documentary Collection(DP & DA)

Open Account
• An open account transaction is a sale where the goods are
shipped and delivered before payment is due, which in
international sales is typically in 30, 60 or 90 days.
• This is one of the most advantageous options to the importer
in terms of cash flow and cost, but it is consequently one of
the highest risk options for an exporter.
• Because of intense competition in export markets, foreign
buyers often press exporters for open account terms since
the extension of credit by the seller to the buyer is more
common abroad. Therefore, exporters who are reluctant to
extend credit may lose a sale to their competitors.

• As agreed between a buyer and seller,
net 30,60,90 day terms etc from date of
invoice or bill of lading date
Time of
payment
• Before payment (depending on how the
products are shipped and the length of
payment options)
Goods
available to
buyer
• Delays in availability of foreign
exchange and transferring of funds
from buyer’s country occur.
• Payment is blocked due to political
events in buyer’s country
Risk to seller
• Seller does not ship per the order(the
product,quantity,quality and or
shipping method).
• Seller does not ship when requested
,either early or late
Risk to
Buyer

Characteristics of an Open Account Transaction
Applicability Recommended for use (a) in low-risk trading
relationships or markets and (b) in competitive markets
to win customers with the use of one or more
appropriate trade finance techniques
Risk Substantial risk to the exporter because the buyer could
default on payment obligation after shipment of the goods
Pros Boost competitiveness in the global market
Help establish and maintain a successful trade relationship
Cons Significant exposure to the risk of non-payment
Additional costs associated with risk mitigation measures

Disadvantages:
•It is risky; trust is a very important factor
• Assurance of payment from the importer is not given
•Risk relating to political events imposing some restrictions
on the remittance of funds from importing country to the
exporter’s country
•The exporter’s funds are tied up till the goods are accepted
by the importer.

Bills of Exchange
Bills of exchange is a document in writing or a draft which can be
drawn by individuals or banks directing a certain person to pay a
certain sum of money on demand or at a fixed or determinable
future time period, to the bearer of the document.
Bills of exchange contains an unconditional order signed by the
maker or drawer of that bill, addressed by one person(drawer) to
another(drawee) obliging the drawee to pay the certain sum of
money specified. It has to be accepted by the drawee or someone
on his behalf. It is just a draft till its acceptance is made.
Bills of exchange can be negotiated which means it is a negotiable
instrument. A bill of exchange is a binding agreement which legally
binds the parties concerned, and is enforceable by law.
Bills of exchange are primarily used in international trade. A bill of
exchange is generally drawn by the creditor upon his debtor.

The components of Bills of Exchange(BOE)
1. Signed by the Maker
2. Directs a certain person to pay
3. Certain sum of Money only to
4. Certain person or the bearer.
Sometimes a bill of exchange also requires a “Co-acceptance” i.e. a
guarantee by drawee’s bank in case he defaults in payment to payee.

Essentials Of A Bill Of Exchange
1. A bill of exchange must be in writing.
2. It must be dated and stamped.
3. It must be signed by the maker or drawer.
4. The name of the drawer must be clearly mentioned.
5. The order must be an unconditional one.
6. It must contain an order to pay money and not goods.
7. The sum payable must be specified.
8. The money must be payable to a definite person or to his order or
to the bearer.
9. The amount should be paid within a stipulated time.
10. It must have adequate stamp duty at the prescribed rate.

The Parties Involved In Bills Of Exchange(boe)
Drawer:
• Maker of the bill.
• The person who
orders to pay.
• The drawer writes
the various details
including the
monetary amount,
date, and the
payee on the draft.
Drawee:
• The person who is
directed to pay.
• The one who
receives it.
obliged to make
payment.
Payee:
authorized to
obtain a payment.
• The one whom
payment is to be
made.
• A payee is paid in
cash, check or
other transfer
medium by a
payer.

Types Of Bills Of Exchange
1)Basis of Period:
•Demand bills- There is no fixed date for the payment of such bill. They
become payable at any time, when they are presented before payee by the
holder.
•Term bills- These bills are payable after specified period of time. The
period after which these bill become due for payment is called tenor.
2)Basis of Object:
•Trade Bills- These bills are drawn and accepted against the sale and
purchase of goods on credit. These are drawn by the seller (creditor) and
accepted by the buyer (debtor).
•Accommodation Bills- Such bills do not involve any sale and purchase
of goods, rather they are drawn without any consideration. The purpose of
such bills is to help one party or both the parties financially.

Classification Of Bills Of Exchange
Inland
Bill
• These bills are drawn in a country upon
person living in the same country or made
payable in the same country. Both drawer
and the drawee reside in the same country.
Foreign
Bill
• These bills are drawn in one country and
accepted and payable in another country, e.g.
a bill drawn in England and accepted and
payable in India.

Advantages of Bills of Exchange
1. It facilitates movement of capital, because it is an instrument of
credit.
2. It is a valid evidence of debt. It is a full proof of indebtedness.
3. Since the date of payment is fixed, debtor knows when he has to
pay and the creditor knows when to expect his money.
4. The creditor can allow credit and at the same time capital is not
locked up.
5. Since it is a negotiable instrument, it can easily be transferred in
settlement of debts.
6. It is easy and convenient for remitting money from one place to
another place.
7. Free transfer facility of bills enhances commercial transactions.
8. If the Drawer is in need of money, the Bill can be converted into
cash, by discounting it with a bank, at a very nominal expense.

Disadvantages Of Bills Of Exchange
1) It lead to credit sales.
2) Chances of dishonor of bill.
3) Insolvency due to death of the party concerned.
4) It may lead to business loss when a person lost the bill.
5) It is a can be used as a legal evidence.
6) Extra cost.
7) Additional burden on the bank.

Cash-in-advance
• With cash-in-advance payment terms, an exporter can
avoid credit risk because payment is received before the
ownership of the goods is transferred. For international
sales, wire transfers and the Internet, escrow services are
becoming another cash-in-credit cards are the most
commonly used cash-in-advance options available to
exporters. With the advancement of advance option for
small export transactions.
• However, requiring payment in advance is the least
attractive option for the buyer, because it creates
unfavorable cash flow. Foreign buyers are also concerned
that the goods may not be sent if payment is made in
advance. Thus, exporters who insist on this payment
method as their sole manner of doing business may lose
to competitors who offer more attractive payment terms.

Key Points
• Full or significant partial payment is required,
usually via credit card or bank or wire transfer or
escrow service, before the ownership of the goods is
transferred.
• Cash-in-advance, especially a wire transfer, is the
most secure and least risky method of international
trading for exporters and, consequently, the least
secure and an unattractive method for importers.
However, both the credit risk and the competitive
landscape must be considered.
• Exporters may select credit cards as a viable cash-
in-advance option, especially for small consumer
goods transactions.

• Exporters may also select escrow services as a
mutually beneficial cash-in-advance option for small
transactions with importers who demand assurance
that the goods will be sent in exchange for advance
payment.
• Insisting on cash-in-advance could, ultimately, cause
exporters to lose customers to competitors who are
willing offer more favorable payment terms to foreign
buyers.
• Creditworthy foreign buyers, who prefer greater
security and better cash utilization, may find cash-in-
advance unacceptable and simply walk away from the
deal.
Key Points

Characteristics Of Cash In Advance
• Applicability
Recommended for use in high-risk trade relationships or
export markets, and appropriate for small
export transactions.
• Risk
Exporter is exposed to virtually no risk as the burden of
risk is placed almost completely on the importer.
PRO’S CON’S
• Payment before shipment
• Eliminates risk of non-
payment
• May lose customers to
competitors over payment
terms
• No additional earnings
through financing
operations

Wire Transfer: Most Secure and Preferred Cash-In-
Advance Method
• An international wire transfer is commonly used and
is almost immediate. Exporters should provide clear
routing instructions to the importer when using this
method, including the receiving bank’s name and
address, SWIFT (Society for Worldwide Interbank
Financial Telecommunication) address, and ABA
(American Bankers Association) number, as well as
the seller’s name and address, bank account title, and
account number.
• The fee for an international wire transfer can be paid
by the sender (importer) or it can be deducted from
the receiver’s (exporter’s) account.

Credit Card: A Viable Cash-in-advance
Method
Exporters who sell directly to foreign buyers may select
credit cards as a viable cash-in-advance option, especially
for small consumer goods transactions. Exporters should
check with their credit card companies for specific rules
on international use of credit cards. The rules governing
international credit card transactions differ from those for
domestic use. Because international credit card
transactions are typically placed using the Web,
telephone, or fax, which facilitate fraudulent transactions,
proper precautions should be taken to determine the
validity of transactions before the goods are shipped.
Although exporters must tolerate the fees charged by
credit card companies and assume the risk of unfounded
disputes, credit cards may help the business grow because
of their convenience and wide acceptance.

Escrow Service: A Mutually Beneficial Cash-in-
advance Method
Exporters may select escrow services as a mutually beneficial
cash-in-advance option for small transactions with importers
who demand assurance that the goods will be sent in exchange
for advance payment. Escrow in international trade is a service
that allows both exporter and importer to protect a transaction
by placing the funds in the hands of a trusted third party until a
specified set of conditions are met. Here’s how it works: the
importer sends the agreed amount to the escrow service. After
payment is verified, the exporter is instructed to ship the goods.
Upon delivery, the importer has a pre-determined amount of
time to inspect and accept the goods. Once accepted, the funds
are released by the escrow service to the exporter. The escrow
fee can either be paid in full by one party or split evenly
between the exporter and the importer. Cross-border escrow
services are offered by international banks and firms that
specialize in escrow and other deposit and custody services.

Payment By Check: A Less-attractive Cash-in-advance
Method
Advance payment using a check drawn on the importer’s account
and mailed to the exporter will result in a lengthy collection delay
of several weeks to months. Therefore, this method may defeat the
original intention of receiving payment before shipment. If the
check is in U.S. dollars and drawn on a U.S. bank, the collection
process is the same as it would be for any U.S. check. However,
funds deposited by non-local checks, especially those totaling more
than $5,000 on any one day, may not become available for
withdrawal for up to 10 business days due to Regulation CC of the
Federal Reserve (§ 229.13 (ii)). In addition, if the check is in a
foreign currency or drawn on a foreign bank, the collection process
can become more complicated and can significantly delay the
availability of funds. Moreover, if shipment is made before the
check is collected, there is a risk that the check may be returned due
to insufficient funds in the buyer’s account or even because of a
stop-payment order.

When To Use Cash-in-advance Terms
• The importer is a new customer and/or has a less-
established operating history.
• The importer’s creditworthiness is doubtful,
unsatisfactory, or unverifiable.
• The political and commercial risks of the importer’s
home country are very high.
• The exporter’s product is unique, not available
elsewhere, or in heavy demand.
• The exporter operates an Internet-based business
where the acceptance of credit card payments is a
must to remain competitive.

•Collection of a given sum of money due from the
importer by a bank against delivery of certain documents
at the instruction of the exporter.
• Parties involved:
1. The Exporter
2. Exporters/Remitting Bank
3. The Importer
4. The Importer’s/Collecting bank
Documentary Collection

Documents Against Payment (DP)
•Also referred as Cash against Documents/Cash on
Delivery.
• D/P means payable at sight (on demand).
•Collecting bank hands over the shipping documents.
•Attached instructions to the shipping documents shows
"Release Documents Against Payment“.
•Transactions seem fairly safe from the seller’s
perspective

Risks Involved in D/P
•The buyer can refuse to honour payment on any
grounds.
•When the goods are shipped long distances, say from
Hong Kong to the United States, it is usually impractical
and too expensive for the seller to ship them back home.
•The seller is forced to sell the goods in the original
country of destination at what is usually a heavy
discount.
•In cases of shipments by air freight, it is possible that
the buyer will actually receive the goods before going to
the bank and paying for them.

If the importer refuses to pay, the exporter can:
•Protest the bill and take him to court (may be expensive and
difficult to control from another country).
•Find another buyer or arrange a sale by an auction.
If the importers refuses to pay, the collecting bank can act on the
exporter's instructions shown in the Remitting Bank schedule that
are as follows:-
•Removal of the goods from the port to a warehouse and insure
them.
•Contact the case of need who may negotiate with the importer.
•Protesting the bill through the bank's lawyer.

Procedure of D/P
Exporter
Credit the
account of
Exporter’s
bank
Importer’s
bankImporter
Informs
Makes
Payment
Hands over
documents
Sends
remittanc
e

• The D/A transaction utilizes a term or time draft.
•The Exporter allows credit to Importer, the period of
credit is referred to as Usance.
•The importer/ drawee is required to accept the bill to
make a signed promise to Pay the bill at a set date in
the future. When he has signed the bill in acceptance,
he can take the documents and clear his goods.
•The payment date is calculated from the term of the
bill, which is usually a multiple of 30 days and start
either from sight or form the date of shipment
Documents Against Acceptance

Risks Involved in D/A
•As with a D/P, the importer can refuse to accept the goods for any
reason, even if they are in good condition.
•The buyer can default on the payment of a trade acceptance. Unless it
has been guaranteed by the clearing bank, the seller will need to
institute collection procedures and/or legal action.
The exporter runs various risk. The importer might refuse to pay on the
due date because :
•He finds that the goods are not what he ordered.
•He has not been able to sell the goods.
•He is prepared to cheat the exporter (In cases the exporter can protest
the bill and take the importer to court but this can be expensive).
•The importer might have gone bankrupt, in which case the exporter
will probably never get his money.

Procedure of D/A
Exporter Sends acceptance to
Exporter’s
bank
Importer’s
bankImporter
Sends
acceptance
to
Informs
Accepts Usance Draft
Hands over Documents

Advantages for the Seller in D/P and D/A
Transactions
•The bill of exchange facilitates the granting of
trade credit to a buyer.
•It can provide the seller access to financing.
•The bill of exchange is formal, documentary
evidence, acceptable in most courts, confirming
that the demand for payment (or acceptance) has
been made to the buyer.

What Is A L/C?
• An L/C is a commitment by a bank on behalf of the
buyer that payment will be made to the exporter,
provided that the terms and conditions stated in the LC
have been met, as verified through all required
documents.
• An L/C is useful when reliable credit information about
a foreign buyer is difficult to obtain, but the exporter is
satisfied with the creditworthiness of the buyer’s foreign
bank.
• The buyer pays his or her bank to render this service.

Parties To The L/C
• 1. The applicant i.e. The importer
• 2. The issuing bank i.e. The importer’s bank.
• 3. The advising bank i.e. the bank acting as an
agent of the issuing bank in the exporter’s country.
• 4. The beneficiary i.e. The exporter

Types Of L/C
• 1. SIGHT LETTER OF CREDIT :
 A letter of credit that is payable as soon as the required
documents have been presented.

2. CONFIRMED OR UNCONFIRMED LETTER OF
CREDIT:
 An irrevocable letter of credit is confirmed when
another bank adds its confirmation to the Letter of
Credit.
 A confirmed letter of credit is typically used when the
issuing bank of the letter of credit may have
questionable creditworthiness and the seller seeks to get
a second guarantee to assure payment. The exporter
obtains undertaking of payment from two banks; issuing
bank and confirming bank.

3. Negotiable Letter of Credit :
 An exporter may receive payment under a letter of
credit quite a long period of time especially when
letter of credit is available not at sight, but certain
period after shipment under usance letter of credit
terms.
4. Back-to-Back L/C :
 Two L/C are issued.
 It is a transaction involving an intermediary between
the buyer and seller, such as broker.
 First L/C is issued by the buyer’s bank to the
intermediary and second L/C is issued by the
intermediary’s bank to the seller.

5. Revolving Letter of Credit :
 If buyer and seller are trading the same commodity
regularly on a certain period of time than they may
choose to work with a revolving letter of credit instead
of issuing a new LC every shipment.
 Buyer’s bank (issuing bank) issues a letter of credit that
replenishes either in value or in time.
 Revolves by value : Letter of credit is reissued
automatically when credit amount is utilised.
 Revolves by time : an amount is available in fixed
instalments over a period

• 6. Standby L/C:
 A standby L/C is a guarantee of payment issued
by a bank on behalf of a client that is used as
“payment of last resort” should the client fail to
fulfill a contractual commitment with a third
party.

7. Red Clause L/C:
 A red clause L/C is a specific type of L/C in which a buyer
extends an unsecured loan to a seller.
 The funds provided here are known as advances. These
advances are then deducted from the face amount of the
credit when it is presented for payment.
 These L/C are usually employed to facilitate international
exports and trade.
8. Green Clause L/C:
 A condition in a guarantee document that allows a buyer to
receive advances ahead of shipment against collateral
property represented by warehouse receipts.
 Use of a green clause L/C is often used in the agricultural
business where a company can fund the harvest of a new
crop by pledging available stock as collateral.

9. With recourse and without recourse L/C:

Method of payment

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